Informatica's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.20.11 | About: Informatica Corporation (INFA)

Informatica (NASDAQ:INFA)

Q3 2011 Earnings Call

October 20, 2011 5:00 pm ET

Executives

Earl Fry - Chief Administrative Officer, Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Global Customer Support and Secretary

Stephanie Wakefield - Vice President of Investor Relations

Sohaib Abbasi - Chairman, Chief Executive Officer and President

Analysts

Brent Thill - UBS Investment Bank, Research Division

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Thomas Ernst - Deutsche Bank AG, Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Edward Maguire - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Steven R. Koenig - Longbow Research LLC

Michael Turits - Raymond James & Associates, Inc., Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Mitesh Dhruv - BofA Merrill Lynch, Research Division

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

Operator

Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Informatica Q3 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Ms. Stephanie Wakefield, Vice President of Investor Relations. Ma'am, you may begin your conference.

Stephanie Wakefield

Good afternoon, and thank you for joining us today. I'm here with Sohaib Abbasi, our CEO; and Earl Fry, our CFO, to discuss our Q3 2011 results and to talk about our outlook for the business. I'll read the safe harbor and then hand it over to Sohaib for his comments.

Some of the comments we'll make today are forward-looking statements, including statements concerning our projected financial results for future periods, our growth and operational strategies, our market and growth opportunities, our technology leadership and product development, our product portfolio and opportunities, customer adoption of and demand for our products and services, including product upgrades and new releases, the expected use of and benefits from our products and services, the expected benefits of our partnerships and acquisitions, our effective tax rate, our herring [ph] plans, the impact of our recent acquisitions and our expectations regarding future industry trends and macroeconomic development.

All forward-looking statements are based upon current expectations and beliefs. However, actual results could differ materially. There are many reasons why actual results may differ from our current expectations. These forward-looking statements should not be relied upon as representing our views in any subsequent date. And Informatica undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date that they are made. Please refer to our recent SEC filings, including our quarterly report on Form 10-Q for the quarter ended June 30, 2011, for a detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by contacting our Investor Relations department.

During this afternoon's discussion, we will be using GAAP and non-GAAP numbers. Our GAAP results and the reconciliation of the GAAP results to the non-GAAP results are attached in the earnings press release and also available in the Supplemental Metrics section of our Informatica Investor Relations website.

Before I hand it over to Sohaib, I'd like to remind you that this call is also being webcast and will available for replay at www.informatica.com/investor. I'd also like to ask you when we get to the question-and-answer period to please confine yourself to just one question. We will allow additional questions if time permits. Thank you. Sohaib?

Sohaib Abbasi

Thank you, Stephane. In Q3 2011, we obtained record results for third quarter license revenue, total revenue as well as EPS. Our Q3 results showcase the increasing customer demand, growing adoption of our expansive product portfolio and our strengthening partner ecosystem. After Earl's presentation of our financial results, I will reiterate the key reasons for our firm conviction in our long-term growth plan beyond $1 billion in revenue.

Total revenue grew by 21% year-over-year to $196 million. New license revenue grew by 20% to $83.7 million. Q3 was not only the eighth consecutive quarter with year-over-year revenue growth of 20% or more, it also extended the Informatica track record as the 34th consecutive quarter of sustained revenue growth despite the great recession.

Total non-GAAP operating income grew by 27% with non-GAAP operating margin up 27.3%. With non-GAAP EPS of $0.34, we achieved the most profitable third quarter to date. The record Q3 results yet again illustrate our long-term growth potential.

The increasing customer demand signifies that organizations aspire to become data-driven enterprises in order to better manage in these times of macroeconomic uncertainty.

In EMEA, we attained third quarter record results with broader adoption of our latest products. In the Americas, our results include important wins across multiple verticals, including financial services, government and retail. To reiterate, by empowering the data-driven enterprise, data integration now has a more strategic role than ever before, as illustrated by our customer wins around the world.

In Europe, the interior ministry of a major government selected Informatica to upgrade its homeland security infrastructure. This organization will use Informatica Identity Resolution technology to match information related to visitors against their watch list to deny access. Not only will this organization be better prepared for the higher traffic associated with any future international events, it realized more immediate results by denying entry to individuals with criminal records in their first weekend of operations.

In the U.S., a leading brokerage and securities firm selected Informatica as the standard for its mission-critical, front office electronic-trading applications. By replacing 4 legacy messaging solutions with Informatica Ultra Messaging, this firm expects to eliminate performance bottlenecks and reduce latency in order to process more transactions at a lower cost.

As a reminder, over the past 5 years, our opportunity has grown from enabling a single discretionary data warehousing IT project to being selected for multiple high-priority operational data integration IT projects. These emerging high-priority projects include big data as well as hybrid cloud IT initiatives. As a result of this trend, 60% of our deals over $100,000 are with customers that plan to use Informatica for more than data warehousing. In addition in Q3, 80% of our professional services fees were from consulting engagements beyond traditional data warehousing.

Growing customer adoption across the expansive scope of our product portfolio is elevating Informatica's role as a mission-critical IT partner for our customers. Continued strong growth in the core data integration and data quality categories clearly reflects higher priority assigned by customers to data integration projects as well as increasing interest in Big Data initiatives.

With growing adoption, 73% of active customer projects have upgraded to the latest Informatica 9 release. As one illustrative example, a leading home improvements retailer selected Informatica 9 as the standard for their corporate-wide customer of the future initiative. With a holistic view of customer data, the retailer will be better prepared to fulfill customer demand and even predict future purchases based on past purchasing patterns.

More importantly, by utilizing the unique Business-IT Collaboration facilities in Informatica 9, business users will more likely gain relevant and trustworthy data. We continue to benefit from impressive competitive wins across the newer categories including MDM, ILM and Ultra Messaging.

In Q3, 26% of our transactions over $100,000 included products in these new categories. As one example of such a comparative win, a leading agricultural technology leader selected Informatica MDM to build a customer data hub across multiple brands and multiple distribution channels. By utilizing the unified multi-domain capabilities, this customer data hub will manage the complex relationship between their customers, such as farmers, and the enterprise across multiple brands, multiple channels and, of course, multiple products. The firm expects that this authoritative single view of customer data will help increase revenue through cross-sell across brand and promote customer loyalty through better service across channels.

Finally, our broadest ever product portfolio is driving new partnership opportunities. Since July, we've further expanded and strengthened key partnerships with QlikTech and a leading cloud computing vendor. QlikTech, the pioneer in the new business discovery category, chose Informatica as the data integration partner to help join customers leverage the wealth of existing data as well as be better prepared for Big Data initiatives.

The power of Informatica to access data residing in the broadest range of data sources complements the simplicity of QlikView to quickly analyze data in memory. The combination of Informatica's near universal access with QlikView's user-driven analysis will help customers quickly and efficiently manage and analyze large volumes of data.

As an expansion of our partnership, a leading cloud computing vendor selected Informatica Data Quality and Informatica Cloud to power their latest data-as-a-service offering. As an example, users will gain trustworthy customer contact data with embedded Informatica Data Quality services.

To sum up, our record Q3 results demonstrate yet again the increasing customer demand, growing adoption of our product portfolio and strengthening partnering system.

Now I will turn it over to Earl to give you more details on our financial results. After Earl's comments, I'll discuss our multi-year plan to exceed $1 billion in revenue.

Earl Fry

Thanks, Sohaib. Our Q3 total revenues came in at a third quarter record $195.9 million, up 21% on a year-over-year basis. License revenues were $83.7 million, up 20% year-over-year. Service revenues were a record $112.2 million up 23% year-over-year. Breaking down the components of service revenues: maintenance revenues were record $81.7 million, up 24% year-over-year; and consulting education and subscription revenues came in at another record of $30.5 million, up 18% year-over-year.

Turning to our deal metrics. We added 80 new customers during Q3 and did license business with 325 existing customers. These existing customers contributed 85% of our license order value compared to 84% of the second quarter and 87% a year ago.

We built a third quarter record 18 transactions over $1 million, up from 11 the year ago third quarter and we closed 71 deals over $300k compared to 73 deals over $300k in the year ago, third quarter.

Customers continue to make bigger bets on Informatica and this is clearly reflected in the continued increase in our average transaction size. Our average transaction sizes for orders over $100k came in at over $413,000 and the average transaction size for orders over $50k came in at $303,000, both up from year ago levels of $393,000 and $299,000, respectively.

These metrics are particularly strong when considering that our largest transaction during the third quarter was less than $5 million. From a channel perspective, 31% of our license orders came from the indirect channel and an additional 33% of our direct orders in Q3 were referred by partners or resellers. The overall total of indirect and referred orders was 64%, consistent with the year ago quarter and up from 55% last quarter.

License revenue from our Direct business was 69% in Q3 and 31% of our license revenue came from the indirect channels in Q3. Indirect orders and revenues were favorably impacted by strong seasonal contribution from our public sector sales, which typically go through resellers and distributors.

Moving to geographic mix. North America orders as a percentage of total license orders were 68% versus 70% a year ago. The mix of orders from EMEA and the rest of the world was 32% compared to 30% a year ago. North America revenue was 68% of total revenue in Q3 compared to 72% a year ago and revenue from EMEA and the rest of the world was 32% of total revenue in Q3, up from 28% a year ago.

Our European business in particular performed well during the third quarter. From a vertical industry perspective, we had contribution from a broad range of verticals. Financial services, public sector and retail were our top contributors to new license orders with the high tech and manufacturing verticals close behind.

We are particularly encouraged by the growth and contribution from the retail sector this year due in large part to strong contribution from our Master Data Management offering.

Non-GAAP gross profit, which excludes $5.2 million in amortization of acquired technology and $9 million of stock comp came in at $165.3 million or 84% of revenue in Q3, and was relatively consistent with both the prior and year-ago quarters.

License margins of 99% were also relatively consistent with both the prior and year-ago quarters. And the service margins driven by better than 95% maintenance renewal rates were 74%, and again, relatively consistent with the prior and year-ago quarters.

Excluding charges for stock comp, amortization of intangible assets and facilities restructuring and acquisitions-related adjustments totaling $10.5 million, Q3 non-GAAP operating expenses were $111.8 million, up from $110.5 million in the second quarter and up from $93.2 million in the year ago third quarter.

While spending in absolute dollars has increased, as a percentage of revenue, non-GAAP operating expenses were 57% of revenue for the third quarter consistent with the second quarter and better than 58% in the year-ago quarter.

We generated $53.5 million in non-GAAP operating income, up 27% from a year ago. Non-GAAP operating income as a percentage of revenue was 27.3%, up by just over 100 basis points from a year ago. Bottom line, we delivered another record third quarter with GAAP fully diluted EPS of $0.24 and non-GAAP fully diluted earnings per share of $0.34, which was $0.02 per share better than the high end of our guidance.

Total headcount was 2,478 at the end of Q3, an increase of 134 from the prior quarter and up 454 from a year ago. Sales and marketing headcount ended the quarter at 837, an increase of 28 from the second quarter and up 123 from a year ago.

Our balance sheet and cash flow metrics reflect the continued strength of our business model. We generated a third quarter record cash flow from operation of over $37 million. And over the past 12 months, we've generated a record $174 million in cash flow from operations.

We ended the quarter with $554 million in cash and investments, a $10.5 million decrease from Q2 as we used $50 million to repurchase stock and made a $4 million payment for an acquisition during the quarter.

DSOs were 60 days in Q3 compared to 59 days in Q2, 55 days in a year ago quarter and within our target DSO range of 55 days to 65 days. Our deferred revenue balance increased to $199.9 million and is comprised of $193.4 million in current deferred and $6.5 million in long-term deferreds. Deferred revenues are up over $40 million from a year ago and up just under $4 million sequentially.

The Q3 increase in deferreds was achieved despite a sequential $4 million currency headwind. Now based on our Q3 orders, our potential future revenues disclosure which includes deferred revenue balances as well as orders not yet taken to revenue as of September 30, was $222 million, an increase of $40 million compared to a year ago but down by just under $4 million sequentially due primarily to a sequential $5 million currency headwind during the third quarter.

During the quarter, we had an average of 112.4 million shares outstanding on a fully diluted basis and we repurchased 1.1 million shares of our stock during the quarter. Our tax provision was 30.8% in the quarter due to several discrete items that were specific to the third quarter and while the tax provision will continue to be very sensitive to our geographic mix of earnings, we've continued to expect our effective tax rate for the year to be no more than 30% on both the GAAP and non-GAAP basis before the impact of any discrete tax item.

On a macro level. We expect some continuing level of uncertainty and expect the overall macro environment to remain choppy. However, we see a vast majority of our customers and prospects placing an increasingly high priority on investing in data-driven initiatives. Based on these expectations, for the fourth quarter 2011, we are targeting revenue of $218 million to $228 million with non-GAAP EPS in a range of $0.43 to $0.45, and are therefore, adjusting our guidance for the full year 2011 to a range of $775 million to $785 million and to a non-GAAP EPS range for the year of $1.38 to $1.40.

Looking forward to 2012. While we do remain cautious about the macro environment, we are optimistic about our prospects and continue to operate the business with dual objectives: strong revenue growth and measured improvement in operating margins.

We are setting our initial targets for 2012 with a revenue range of $880 million to $910 million in revenue and non-GAAP EPS in a range of $1.57 to $1.67 per share. Our non-GAAP EPS targets do not include the after tax impact of an estimated $0.04 per share purported charge for the amortization of intangibles and acquired technology, the facility's restructuring charge of roughly $0.005 per share per quarter, the tax effect and impact to stock comp of approximately $0.05 to $0.06 per share per quarter and any major acquisition cost and expenses.

I'd like to also add that we continue to expect typical seasonal influences in our business and would encourage investors to take this into account as you review your financial models for 2012, particularly as you start to think more deeply about the first quarter of 2012. With that, I'll turn it back over to so Sohaib.

Sohaib Abbasi

Thanks, Earl. Last quarter's results are further evidence of our sustained growth opportunity. Our conviction in our multiyear plan to exceed $1 billion in revenue is higher than ever with 3 key reasons: an expanding addressable market; broad-based knowledge technology leadership; and sustained #1 ranking in customer loyalty.

First, with our expansive product portfolio, we believe we have increased our addressable market from $11 billion in 2005 to more than $50 billion by 2014 as measured by high key spend on software and services.

And the secular technology trends of cloud computing and Big Data are further fueling demand and expanding the market opportunity. Cloud computing is further fragmenting data across silos of disparate cloud service providers beyond on-premise IT systems. The opportunity for Informatica is to enable the hybrid IT organization by integrating data from on-premise applications and cloud services.

Big Data represents not just explosive growth but also broader variety and higher velocity of data. Most importantly, Big Data holds the promise of more business value for 4 tasks: analyzed transaction data; relate social media data; correlate device sensor data; and expedite the processing of large volumes of data with the latest open source technology, Hadoop.

As Hadoop and [indiscernible] use in particular is yet another programming environment, the Informatica Platform complements, extends and completes the Hadoop to help realize the promise of Big Data for each of those 4 tasks by providing trustworthy transaction data to analyze, identify relevant social media interaction data to relate, delivering actionable device sensor data to correlate and finally, integrating a holistic view of data to process using Hadoop. Our value proposition for customers simply is to maximize the return on data by increasing the value of data and reduce the cost of data.

Second, as an acknowledged technology leader and a pioneer in multiple technology category, Informatica is well-positioned to gain market share. Informatica has been continuously ranked as a leader by industry analyst firms in multiple categories, including Enterprise Data Integration, Data Quality and Master Data Management.

To further advance our technology leadership and pursue the incremental Big Data opportunity, Informatica will introduce the first data parser for Hadoop, H Parser [ph]. H Parser [ph] will help automate the most common use case of Hadoop for processing unstructured and semi-structured data in weblog files, XML files and other formats such as JavaScript Object Notation also known as JSON.

By combining the proven, underlying meta-parser technology of the Informatica Platform with the highly scalable, cost-effective power [ph] computing framework [indiscernible] produced, H Parser [ph] will enhance development activity by seamlessly extending Hadoop.

Finally, our top customer loyalty ranking bodes well for Informatica to maintain our momentum. A recent customer survey by TNS, an independent third-party research firm concluded that for the sixth consecutive year, Informatica retained the #1 customer loyalty ranking among vendors that offer data integration technology. In fact, 84% of customers surveyed recognize Informatica as the technology leader and more than 89% confirmed that Informatica technology direction is well-aligned with their own longer-term IT plans.

With the top customer loyalty ranking, we are well-positioned to upsell and cross-sell our broadest-ever product portfolio within our base of 4,500 customers.

Last month, my meetings with senior IT executives at 11 different customers underscored some common themes. First and foremost, they share a common aspiration to become data-centric enterprises. One of the executives summed it up by stating that their IT priorities were driven by the recognition that data is foundational. And each of these senior executives increasingly credit Informatica for expanding beyond a single product vendor with the potential to become one of the top strategic business-critical partners. Furthermore, these customers value Informatica's track record of neutrality as an insurance against being locked in to a single industry giant or being locked out of their single, most valued IT asset, their data, both on-premise and in the cloud.

With an expanding addressable market, acknowledged technology leadership, increasingly strategic partnerships with our customers, we are well poised to pursue our plan to exceed $1 billion in revenue.

So with that, I will open it up for your questions. As Stephanie said earlier, we would appreciate it if you could confine yourselves to one question. Thank you. Operator, may we have the first question?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tom Ernst with Deutsche Bank.

Thomas Ernst - Deutsche Bank AG, Research Division

So Earl, just an observation and if you can comment on this, it looks like based on the balance sheet, health and the strength of your backlog, relative to your license, which was good but showed a modest deceleration, to perhaps there was more back-end weighting to the quarter. How was the environment as you closed out September? Did you find the macro environment becoming more of a headwind? Or is some of the commentary you gave us about being prudent about looking forward, is that precautionary or an observation of some real weakness you are actually seeing?

Earl Fry

I think it's precautionary. And it's very consistent with how we saw things really just ending the June quarter. So I think the quarter shaped up pretty much how we expected. Q3, just to remind you, is always a little more back-end loaded particularly out of what comes out of Europe, which performed very well for us. The one -- I think, in general, we're seeing lots of strength across the board probably as much breadth as we've seen in the past several quarters, particularly we're seeing some of the federal budget flush helping us in the September quarter. I think where it's choppier, where there's some level of uncertainty, you still see some of the domestic financial services firms, some in pockets being a little more cautious or taking longer to make decisions or having higher sign-off authority. Other than that, it was pretty much as we expected for Q3. And I think in this environment, I don't think any company quite frankly is being paid to lean too far out over their skis in terms of giving their guidance.

Operator

Your next question comes from the line of Mark Murphy of Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Earl, you've reported I think now 8 consecutive quarters of 20%-plus license revenue growth, really a remarkable streak. And you had said previously that this was unlikely in Q4 just because it's a very difficult comparison. I think you have currency probably working against you as well. I guess I'm just wondering based on the current pipeline, is there any way you can fine-tune the license outlook for Q4 and maybe also just roughly what you're thinking there for 2012 for the license mix?

Sohaib Abbasi

Yes. As I stated before, Q4 last year was very atypical from a seasonality standpoint. So even if you look at our guidance for Q4, we're definitely not guiding to continuing that kind of 20% just in Q4. That said, I think we would be disappointed if we didn't continue to grow license revenues by at least the double-digit percentage in Q4. And I think once you get past that Q4, the tough Q4 '10 comparison I think as you look out to 2012, I think 2011 has shaped up as a very typical year from a seasonality perspective. So in terms of what we've guided for the year, I think you could see kind of a similar growth rate both for license and services revenues as you look out to 2012 and I do think the growth rates will -- should be more, at least we're planning on it being more consistent year-over-year on a quarterly basis in 2012 than it has been in 2011.

Mark R. Murphy - Piper Jaffray Companies, Research Division

And then Earl also, just to clarify, I wanted just to understand, are you saying that there was weakness in financial services pretty much exactly consistent with what you expected going into the quarter? Or are you saying that maybe that part of it was just a tad bit below plan? And then just going along with that, was there any change in leadership for your Financial Services group or do you expect any change there in the near term?

Earl Fry

So from a mix perspective, financial services continues to be our largest vertical. It's up by a very healthy double-digit percentage year-over-year. Most of that growth year-over-year, most of third quarter as well as year-to-date, is coming from international and in particular, EMEA. We're seeing growth but slower growth out of our domestic Financial Services business.

Operator

Your next question comes from the line Tom Roderick of Stifel Nicolaus.

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So I know we're supposed to be really nervous in general about Europe. But it certainly doesn't sound like it from your results this quarter that, that was really a source of concern. So I guess it's a 2-part question. Number 1, maybe if you can kind of highlight at a high-level the products and themes that are working particularly well in Europe. And I know ILM was one of those, so some commentary on that would be useful. And then number 2, relative to Tom Ernst's question earlier, to the extent that Europe was back-end loaded and you had some big deals come out of Europe, was that what drove some of the currency headwind on the quarter would license otherwise has been up to your expectations?

Sohaib Abbasi

Let me talk about what we observed in Europe and I'll ask Earl to provide his perspective on that as well, particularly on the currency front. We had a broad-based, strong performance in Europe across all of the regions. We were very pleased with the results we have seen in north, south, central and regional markets, it was broad-based. We had a very strong quarter across multiple verticals. We had a strong quarter in government as well. As we've commented on in the past, I mean there are 2 themes when it comes to public sector spending that has worked in our favor. One is increased focus in homeland security and the other one of course is revenue generation. And we are benefiting from that. I would attribute our strong performance to the execution discipline of our management team that has been able to actually deliver consistent results for a number of quarters.

Earl Fry

And I think you're right, Tom. Clearly, we would have done a little better overall on revenue had the currency movement hadn't gone the way they did at the end of the quarter.

Tom Roderick - Stifel, Nicolaus & Co., Inc., Research Division

And Earl, can you just repeat what that impact was on license from the currency adjustments?

Earl Fry

I actually don't have that kind of from a month-by-month perspective. I mean overall for the quarter sequentially, it was actually relatively neutral. But we have some big pluses and minuses and they're both on the top line and on the bottom line. But it did hurt us on the balance sheet as deferred revenues had a $4 million currency headwind and future revenues had a $5 million currency headwind.

Operator

Your next question is from Ed Maguire of CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Now that you are seeing a much larger proportion of big deals this year versus last year. Could you characterize number 1, the kind of the term of deal cycles, kind of how long it's taking you to close bigger deals and whether you need longer lead time? And also really the transition of your economic buyer as you're becoming a more strategic solution?

Sohaib Abbasi

Let me characterize -- I mean the large transactions, there are 3 types of large transactions. One is driven by the volumes of data that our customers are using our technology more broadly. And that is typically an existing customer that is not deploying our technology more broadly. The second is where they are embarking on a strategic new initiative leveraging one of our newer product lines like MDM, where the transaction size are typically a little but larger. And the third is where they're making a standardization decision for a particular one or more technology areas. The sales cycles certainly vary. We've had some new customers that we've signed up with a large transaction where it has taken us maybe 2 or 3 quarters. So we've not seen, with the exception of a few pockets within financial services, where certain deals did take a bit longer. For example, I met with one of the customers that in the past would have made a decision based on a proof of concept. Now they are engaged with us on a pilot project to make that decision. With the exception of some pockets within financial services in the U.S., the sales cycles have remained consistent with what we've seen in the prior years.

Operator

Your next question is from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank, Research Division

Earl, just on fiscal '12, I guess just when you think about giving guidance at this point, other CFOs that have given guidance at this point have chosen to kind of pull back and weigh the quarter at Q&A. I realize this is the time that you've done it. But just in terms of the concern that, everyone's been feeling, what compels you to give the guidance now considering what we're seeing? Is that just because you feel like your pipeline looks, you've got greater visibility in the pipeline or there's things that are making you more comfortable? I'm just curious just in terms of the mechanics of how you think through given that at this point considering what we're all looking at right now.

Earl Fry

Yes. So I think we -- clearly, we look at our own internal indicators and monitor to see if there are any changes in patterns kind of anywhere. And what we're seeing is pretty consistent. I think we also have some -- given what we went through in the 2008-2009 time period, I think it tested our execution abilities. So even in a much tougher environment, I think we feel confident in our sales teams, our marketing teams' ability to deliver and to operate in that environment. And that goes in large part to the value proposition of the platform. You talked about the explosion of data and the various forms of data. And whether or not a customer is looking to learn more about their customers and trying to grow, trying to grow through acquisitions, trying to go through cross-selling their install base that bodes well for things like our MDM, Data Quality products. If the customers are looking at the negative side of uncertainty and say, "Well, let's just reduce costs everywhere." Then clearly, they would be looking more at our ILM-type products or our core data integration products, which ultimately help them do more with less expense. So I think the value proposition across the platform is what gives us confidence to be able to operate in almost any environment. These are just maybe linked to 1 other point, is we do have kind of 95-plus percent very consistent maintenance renewals. We have very strong quarter in terms of new -- in terms of maintenance booking. We're not seeing any pushback from customers in terms of pricing. So again, it goes to a kind of the value proposition and gives us the confidence that we have a very strong and sticky install base and that their investment in Informatica is a very high-priority investment.

Operator

Your next question is from the line of Mitesh Dhruv of Bank of America.

Mitesh Dhruv - BofA Merrill Lynch, Research Division

Sohaib, if you look at the forward-looking metrics like large deals over $1 million, $500,000, repeat customers, new business, they're like pretty solid this quarter. Yet when I look at your outlook, obviously, understandably, it's very guarded. So I was wondering if you could just walk us through some puts and takes and assumptions in your 2012 guidance as to what assumptions have you used for, let's say the close rate and contributions from verticals like financial services and government relative to 2011. That would be very helpful. And I also have a follow-up. Is it possible to get constant currency growth for Europe?

Sohaib Abbasi

Let me answer your question in terms of our outlook for 2010 and 2012 and beyond impact and then I'll ask Earl to comment as well. We, as you know, Mitesh, we got a tremendous opportunity with our very broad product portfolio to cross-sell and upsell. And it was evident in this quarter, as well as in prior quarters, our ability to position MDM and ILM and both of those newer products are resonating extremely well with our customers, in whether it's embarking on customers' initiatives with MDM or on efficiency initiatives with ILM. In terms of the pipeline, it is the strongest it has been and our internal metrics suggest that the customer demand is higher than ever. And clearly, we have executed very well in Europe and in our primary markets. Our assumptions are that we will continue to have a very compelling revenue proposition. There will be growing interest as a result of some of the mega-trends, including Big Data and cloud that in turn will fuel increased demand. From a macroeconomic environment, what we've observed to date and in my meetings on the East Coast -- I mean I met with 10 financial services companies, and the sentiment that they expressed is that they're all becoming data-driven. They look to Informatica as being, having the potential of becoming a much more strategic partner. They are prioritizing many of the initiatives like MDM and data integration much higher than other initiatives. So both from the customer demand and from our product portfolio, we are very well-positioned.

Earl Fry

And Mitesh, currency movements typically have not impacted the business very much and it doesn't impact the business much on a bottom-line perspective. So even though we have some movement on a revenue perspective, if there are very sharp movements in currency because we have in most areas, particularly in Europe, a reasonably natural hedge because there's a fair amount of development and support expenses there. But that's not something that quite frankly, I track all the time and actually don't have a specific constant currency metrics here with me today.

Operator

Your next question is from the line of Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

I'm not sure if I'm asking the same question or not but do you have the year-over-year revenue FX impact? And those impacts on future revenues deferred of $5 million and $4 million, respectively, I'll assume that was quarter-over-quarter sequential?

Earl Fry

Yes, Michael, that's absolutely correct. The $4 million and $5 million headwind on deferred and future revenues is a quarter-over-quarter. On a year-over-year basis, it's roughly $1 million impact on both negative impact on both the deferred and future revenues. The impact on revenue and overall earnings year-over-year is about $6 million on the revenue line and a benefit of about $0.01 on the EPS line.

Michael Turits - Raymond James & Associates, Inc., Research Division

And if I could have just one follow-up. You had a couple small acquisitions in the July quarter, what was the contribution from those guys in terms of revenue and license revenue into the quarter?

Earl Fry

So those acquisitions are very tiny ones. You can see it on the cash flow that the payment for one of them was $4 million. So the revenue contribution is under for both of those is kind of under $1 million and it was a drag on earnings as we expected. I think we have talked about the expected drag on earnings to be $0.01 or $0.01 to $0.02 for the back half of the year, and let's just say that those 2 small acquisitions are on plan.

Michael Turits - Raymond James & Associates, Inc., Research Division

So under $1 million, combined revenue contribution right?

Earl Fry

In Q3, yes.

Operator

Next question is from Nathan Schneiderman of Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

I have a 2-part question for you. One is, I was just curious why you think -- it seems like Europe has been relatively strong for financials; in U.S., it's weak. And it maybe seems to run a little counter to the macro news. So I'm curious on your thoughts about why that's been the case. And is it your expectation that Europe eventually follows the path that the U.S. is on to a little more conservatism in the financial services sector? And then the second part of my question, you had mentioned some delays and increased sign offs. And I was curious if that was happening across sectors, NGOs or if that was really more of a comment about U.S. financial services?

Sohaib Abbasi

Nate, let me just start by just clarifying that our business group in Financial Services both in the U.S. and in Europe. So overall, we continue to see increased customer demand. And in the case of U.S., the specific comment that we made was that in some pockets, the sales deals are taking a little bit longer. And the example that I gave was of a customer that would typically make a decision based on a proof of concept. Now is working with us on a pilot project that would likely take a few extra weeks. However, the demand for our product portfolio remains very strong. The discussions I had personally with 10 financial services customers on the East Coast were consistent in that they recognize that data integration is becoming increasingly critical for them to remain competitive. It is important for them for regulatory-compliant considerations as well. So, demand looks strong, both here as well as internationally, except for certain pockets where we commented that there were deals that did take a little bit longer than expected. However, our outlook for both of them looks strong.

Earl Fry

And just to reiterate what Sohaib said, we have seen growth in actually kind of double-digit percentage growth in Financial Services year-to-date in total. Much faster growth and very healthy double-digit percentage growth coming out of EMEA and slower growth coming out of the U.S. Yet all sectors and even outside of EMEA looking at other international financial services, that's growing also. So again, I think the comments that it's growing, it's still our largest vertical and quite frankly I think we can execute maybe a little bit better with the U.S. as well.

Operator

Your next question is from the line of Michael Nemeroff with Morgan Keegan.

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

Can you quantify maybe the size of the Cloud business and what your expectations are for its growth in the 2012 guidance? And then if you can maybe help us understand how you expect to manage the potential negative impact on margins since that business is growing so much faster than the rest of the business? And then also I have a question for Sohaib about the upgrade cycle to 9.1. It's 73%, I think you said this quarter, and I was just kind of curious if we've plateaued here and how much more do you expect to get before maybe the next version comes out or if that's still working?

Sohaib Abbasi

Let me comment a little bit about cloud and I'll ask Earl to provide you with some of the numbers that you talked about. There are 2 ways that our innovations in Cloud are contributing to Informatica's overall revenue. Informatica Cloud is a subscription business and it is reported as part of the other line. In addition to that, we have connectors that we've made available for customers to access the data remotely from cloud service providers, including Salesforce.com. And we have dozens of customers that are now using Informatica to enable a hybrid IT environment, where most -- the bulk of their data continues to be on-premise and increasingly, they have data silos across different cloud service providers. They're using Informatica's on-premise products in order for them to integrate not just the silos of data that exist on-premise but also the data that is in the cloud. So the contribution to us is not just the revenue that we report as part of the other line but also as a differentiation for us to win data integration deals.

Earl Fry

And Mike, as you well know on SaaS businesses, in order to get them ramped, I mean they will tend to burn cash as well as hurt the P&L a little bit. We've obviously invested in that over the last 7 years. We're continuing to invest heavily. Our guidance and plans incorporate all of that. So I think we're obviously expecting to continue to grow that business at a much faster rate than the overall business, granted it's starting from a much smaller level. But we are getting to the point where it's getting to be of such a size that it actually is not going to be much of a drag on earnings. And at some point, as you know, those businesses flip around and become very healthy contributors. So that's all factored into the guidance and the plans for next year. It's also why we've also continued to encourage investors to recognize that the growth in operating income as a percent of revenue will be measured. I mean it's not going to be as much as it may have been in the last few years. And you saw that in this most recent quarter, where we've done a couple of tuck-in acquisitions. We're growing Cloud business rapidly and still have managed a little over 100 basis-point improvement in our margin. That's not the 200 or 300 basis points that we had a couple years ago, and people shouldn't expect that kind of rich level but something 100 basis points thereabouts. That's probably manageable.

Sohaib Abbasi

Mike, let me also answer the question about Informatica 9. There are 2 metrics that we're tracking internally. One of which is what percent of the active projects have upgraded to Informatica 9 and that was 73%. And it opens up a lot of opportunities for us to upsell and cross-sell, including our data virtualization product. The other metric that we track is the Informatica 9 platform. What percent of the deals are including the newer product categories? In this most recent quarter, it was 26% of the deals over $100,000 included, one of the newer product categories. So the opportunity available to Informatica is not just to continue to actually upgrade all of the install base to the new product release but also to cross-sell our entire product portfolio. And as you would expect, we do have Informatica 9.5 scheduled for delivery next calendar year and that has a lot of interesting new innovations around Big Data and [indiscernible].

Operator

Your next question is from the line Nabil Elsheshai of Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Just to clarify something, I hate to hit on the macro again. But outside of financial services, have you seen other verticals where you're starting to see delays or pushbacks or there's still primarily U.S. financial services area?

Sohaib Abbasi

It's primarily in, that we've observed, is in the pocket within U.S. financial services. We have not seen any change in the spending patterns in any of the other verticals.

Earl Fry

One could argue in certain sectors and public sectors we've talked about, even though they're contracting or trying to pull in spend, they're actually redirecting. And redirecting as we talked about it, revenue-generating places, in immigration or security kind of initiatives. And there, our portfolio is positioned extremely well.

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Okay and then Sohaib, you gave that attach rate for the newer products. How does that compare to previous quarters? And then do you have any color on some of the more mature attach rate businesses like Data Quality?

Sohaib Abbasi

It is increasing over the last several quarters. The trend is certainly very encouraging. We've had great success with across all of the product lines and that's represented in the metrics that have continued to increase. Data Quality continues to do well. In terms of both the upgrade from version 8 to the new release of version 9, which is much better integrated, is being adopted. And in fact the Data Quality active projects, the percent is even higher than 73%. So more of our Data Quality install base is benefiting from the new release and we are having increasing success positioning Data Quality as part of larger data integration deals.

Operator

And your final question of the evening comes from Derrick Wood of Susquehanna Financial.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

A couple of questions for you guys. First, you give us any color if you're seeing any change in the competitive market or in the pricing environment? And then second would be, just to get an update on your thoughts on M&A, should we be talking about some slower growth and less leverage in the model, is M&A a way to help reaccelerate this and better capitalize on strong interest to data management? Or does this environment that you're facing right now make you a bit more cautious on doing a transaction.

Sohaib Abbasi

We've not seen any changes in the competitive environment. Majority of the deals continue to be uncontested by any commercial competitor. The most frequent competitor we encounter is IBM, 15% to 20% of our deals, and we win the vast majority of those deals. And in a typical quarter, we don't see any other vendor in more than 5% of our deals. No change from our pricing perspective. Our criteria for M&A and our filter for M&A will remain the same. And if you look back in terms of the great recession, during that period of time, we actually had more opportunities for us to accelerate our roadmap. But we will continue to be very disciplined, very focused in expanding our product portfolio in 1 of 2 dimensions, more data-centric technologies and more integration-centric technologies, where we believe we will gain the most synergy. And that filter continues to be the same, we will continue to execute in a very disciplined manner.

Operator

One from Pat Walravens of JMP.

Patrick D. Walravens - JMP Securities LLC, Research Division

My question is simply, as I look on your website, you still have 746 open jobs. But I'm wondering if you have re-prioritized your hiring plans at all since last quarter?

Sohaib Abbasi

We continue to actually add people across all the functions. I mean Earl mentioned that some of the metrics in terms of number of people that we've added even last quarter. We are looking to make sure that we could address whatever sales capacity considerations we require for the coming quarters. And at the same time, we're selectively making staffing decisions in order for us to make sure that we maintain our relentless pace of innovation and we will continue to do both. We will continue to build sales capacity as needed and we will continue to staff to ensure that we maintain our pace of innovation.

Earl Fry

And Pat, we're constantly reviewing priorities of all the new hires. So that's not something that we just do on a one-off basis now and again. That is done on a consistent basis.

Operator

And your next question is from the line of Steven Koenig of Longbow Research.

Steven R. Koenig - Longbow Research LLC

Just to make a quick question here. I think it was last quarter, you all commented that you were seeing perhaps some signs that customers were re-prioritizing cost reduction initiatives over more customer-centric initiatives. Yet MDM is doing pretty well this quarter. That tends to be more customer-centric and doing well not just this quarter but overall. Wondering, are you still seeing signs of that sort of priority shift? Or just any sort of color on that could be helpful.

Sohaib Abbasi

One of the reasons why retail for the first time ended up being 10% of our overall mix was MDM. That a number of retail vendors are focused on customer centricity and customer loyalty initiatives. Many of them are beginning to exploit social media and they believe the MDM is the best way for them to aggregate all the transactional data that they have about their customers, along with all of the interaction data that they can collect about purchasing intentions from the social media world. So MDM is opening up a lot of possibilities around customer centricity. Now as it turns out, in Financial Services, the increased interest in MDM is around Frank-Dodd (sic) [Dodd-Frank] about legal entity identifier to be able to actually identify all of the counterparty information that is required by the regulatory regime. So MDM is being driven by a variety of considerations, it's the universal MDM, multi-domain MDM product. In addition to that, we are seeing increased interest in ILM for both from an efficiency perspective of reducing storage and hardware and software cost, as well as its data privacy perspective, because we do have a very comprehensive data privacy product for both production as well as test data management. We are very well-positioned particularly given our value proposition, do more with less.

Operator

And there are no additional questions in queue at this time. Are there any closing comments?

Sohaib Abbasi

For Q4 and 2011, we remain focused with our singular mission, advance Informatica as the clear leader in data information by helping our customers maximize return on data. As the #1 independent leader, we are well-prepared to maintain our relentless pace of innovation and further expand our addressable market. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.

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